Lifecycle of a CA Multi-Family Development Deal

Scott Choppin · 2017-03-28T20:57:34-07:00

Hi EveryoneAfter reading through many excellent posts, include the "Diary of a New Construction Project" by @J Scott and @Joshua Dorkin, I thought I might add our voice here on BP. I am proposing to track the entire life cycle of an urban infill 4-unit rental housing development project in my hometown of Long Beach, CA. My proposal is to create weekly posts that cover a development project from beginning to end, and to give explanations about what and why we do things certain ways in this project, as well as, the logic behind our decisions. We will share site selection, initial underwriting/proforma analysis, design development, permitting, construction/build out, lease up, and (for this project) final sale. First, an introduction. My name is Scott Choppin. I have been married to my college sweetheart Rebecca for 17 year (together for 23) and we have three kids 15, 13, and 9 years old.The purpose for this series of posts, is to walk everyone through the development process, demonstrating the details and life cycle of a development project. I have had the great benefit of many very savvy teachers, and would like to give the gift of passing on knowledge to others. As well, my purposes include building my own networks of help (tactical, transactional, and professional) to learn, raise more capital, and find more great projects to work on. This is, as you all know (or you do now), the lifeblood of all developers.Finally, out of respect to my partners in this project, some details and proprietary information will stay private and so you may see redactions from time to time. As well, I will try to answer questions, but must limit cost in regards to time, so may be not be able to answer all questions. My goal, is simply to pass on knowledge, be an offer of help, and facilitate new folks in my network. So here goes....Sláinte.Project Basics:City: Long Beach, CAUnit Count: 4 units, rental housing, to be sold upon completion and lease up.Construction Type: Type V, 1 hour, with sprinklers. Type V (pronounced Type 5) is a reference for wood framed construction that most of you are familiar with, with "1 hour" referencing the fire rating between occupancy areas (say between a garage, or other units) where extra drywall is added in the walls between these areas (there's more to it than that, but keeping it simple). The other types are Type I, II, III, IIIa, etc. These would be various forms of concrete, steel, wood and steel mixed. "Sprinklers" means what is says, all units and garages will have residential grade sprinkler systems installed (residential sprinklers normally have plastic or PVC pipes versus steel that you see in commercial applications).Construction style: 3-story on grade town home, direct access ground floor garage. "On grade" is the typical construction methodology that you are all used to where forms are built for the slab and poured onto the graded dirt pad, this is in contrast to "podium" where the cars park underneath in a concrete garage, and another type is high rise construction. "Town home" describes a type of unit, where the living space is on multiple floors, with the same tenant on all floors. Versus stacked flats, like typical apartment units, where different tenants live above and below each other. Garages are the bottom floor of the town home and are direct access to each unit.Unit Type: Multiple bedrooms rented to families.Some maps and then that'll be it for today. Next time, site selection including site photos and discussion about zoning.

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

@Amit M.

Great questions, thanks for your thinking here.

I understand your reaction to what I am delineating in the last couple of posts. Your reaction is warranted as there has not existed what we are building in this exact format until recently.

These specific projects are privately financed moderate income urban family rental housing.

We call this specific type of rental housing UTH which stand for Urban Town House. This is a new housing innovation created by our company that had not been produced at any scale, and hence the reason that you are reacting to the narrative. It hasn't existed in main stream real estate business conversations until now. It is an uncommon offer, and we are enthusiastic about that fact. As you say, "Most CA builder only build higher end, ...otherwise..won't pencil out"

We are grounded in our statement that newly constructed moderate income housing for families can and does pencil out. Our initial set of projects is coming to completion and being sold, and we are producing returns on equity of over 20% IRR, with COC in the mid-teens, based on investment periods for equity around 1 year. This is the innovation that we are pairing private capital with a family oriented housing product delivered at:

1. Naturally occurring affordable moderate rent levels (CA TCAC 2017 rents for LA County, 100% MAI 5 bedroom, $2883).

or

2. True moderate income affordable housing. Generally, this 2nd type of project is rent restricted under a long term covenant, with rent levels at 120% of area median income.

Here moderate income means 80-120% of area median income for Los Angeles county (State of CA definition of "moderate").

What this means is that we have two paths to build moderate income family housing which increases the velocity of our offers (more ways to finance, build, sell or hold). This will also allow us to scale both on project volume (number of projects) and project size.

A few details for UTH:

- 3-story rental townhouse product for large, dual, and multi-generational families.

- Multiple bedroom slab on grade construction with ground floor 2-car direct access garages

- These units are rented to families, then depending on the finance structures, sold upon completion, or some are held long term (LT hold projects have different equity returns than those sold, but LT hold will be case-by-case, depending on project, see Impact Fund below)

- The projects use private capital, meaning they do not use any public sources of money such at LIHTC, HUD, or local sources of soft money typically used for affordable housing at or below 60% of median income.

Note: We can rent to S8 tenants as appropriate. This is the beauty of this design, it's a true crossover between market rate and moderate affordable. UTH serves the missing middle in three ways: in design (town house, 25 du/a), income (middle income families 80-120% MAI), and housing type (between true apartments and SFR).

- Projects are located in low and middle income neighborhoods on purpose, in fact, we prefer it. To your point these might be in up and coming neighborhoods, but normally are not our first choice to keep land costs down.

Two final points:

A. We are continuously raising new capital and are building networks of new HNW and Family Office private equity, which are attracted by the UTH concept and 20% IRR returns. We are constituting our offer in the crowdfunding space, with a specific purpose of raising social impact crowdfund capital attracted to the double bottom line narrative of our UTH projects. And, we are forming two equity funds specifically to finance additional UTH projects. First, a UTH "market rate" equity fund for UTH with no long term rent restrictions. Second, a UTH Housing Impact Fund, to fund true moderate income projects with long term covenants, and that will be held long term.

B. To reiterate, this is workforce housing, designed and built simply and cost effectively on already zoned sites, using only private capital to deliver needed moderate income housing for families to a market STARVED for new housing for families in low income neighborhoods. This is an uncommon offer, and one that CA needs huge amounts more.

Thanks!!

Scott

2 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

@Audrey Ezeh

The post above should answer your finance question.

It's a long read, but does outline how we are financing these projects. I might also add, on the debt side we are using private and commercial construction debt, with very standard MF debt structures.

For permanent debt, the only time we will see this, will be on our LT term hold long term rent covenant projects, where we will work with community lending divisions of banks using their typical permanent debt structures. In most cases, 10 year term, 30 yr amort, 65-75% LTV.

Thanks for your question.

Scott

1 Reply

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

9y

@Scott Choppin that's definitely interesting and a different approach from most CA developers (that are not for profit.) Affordable middle income (aka workforce ) housing is a huge issue in San Francisco and the city ties itself up in knots trying to deliver it. Usually via mandatory afootdable component on market rate (on or off site of project.) some huge projects in the southeastern quadrant (hunters point shipyards) got as much as 33% affordable housing. City also has a small sites fund whereby they compete with market rate devs for infill lots, then turn it over to a non profit to develop.

I don't think SF has middle ground/value areas left to do what you guys are doing as a for profit company (but good for you for ferreting out this niche in LA!) Here the relationship between the city/tenants and developers/property owners/landlords is extremely contentious, and has been for decades. The draconian rent control laws, insane entitlement process, plus robust community resistance to market rate don't help matters. But for a small property owner/value add/neighborhood gentrification investor like myself, all this drama creates a lot of market inefficiencies and distortions, which are very lucrative if played correctly. That's my niche, and it has worked out well. Comme ci comme ca.

0 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

@Amit M.

I accept your interpretation for what goes on in the City itself, re: politics, neighbors, tough entitlement processes. But that's true everywhere in CA to varying degrees, hence the reason we have housing shortages in all major urban centers in CA.

In the Bay Area there are many opportunity areas such as Oakland and other parts of the East Bay, the peninsula south of the City in older towns like Daly City, and in parts of Santa Clara county. We have made assessments of specific sites in a number of Bay Area/Silicon Valley cities, and find the economics work in older low income neighborhoods.

There is opportunity everywhere.

Take care.

Scott

0 Reply

Mike Wood

Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes

9y

@Scott Choppin I am not sure if it play into your design, given that the end game appears to be to sell of completed and fully rented complex, but do you do anything different to ensure low maintenance in the future? For example, on my units they are all raised (in New Orleans, most houses are raised beam on pile foundations due to BFE (base flood elevation) and local elevation requirements (18in above adjacent grade) ) so they all have stairs. On my units my front stairs, I use concrete, since wood will were down quickly and require repeated replacements over its lifetime. I install hardwood (not laminate) so that minor damage can be repaired. I also use composite lumber on all exterior door frames and casing, so they can not rot. If you implement other ideas, I would love to hear them.

Also, I assume that you hold the property for at least 12 months to avoid longer term cap gains, but given the size of the project, my guess is it would be hard to finish and rent it in any less time.

Final question, since this is a fourplex, and it is conceivable that an owner occupant could purchase this project, is that a consideration in your exit strategy? I would require leaving one unit empty so they could occupy the property within 30days of the sale, which could deter some investors. Obviously if it was 5 or more units, the buyer pool would be totally different.

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

Hi Everyone:

It's been quiet, as we have been in the midst of the plan check process with the city. While it has gone reasonably well, there are some lessons to pass on here. No matter how long I've been doing this, there's always some new twist and turn in the process.

For this project we ran into two issues:

1. The code changed this year, (beginning of 2017) from the 2013 code to the 2016 code.

This is important because each time a code is updated, there will be changes in the requirements for the project that you, your team, or most likely your architect will have to deal with for the first time. In most cases, on simple projects, this doesn't put too much friction in the process. You can and should always anticipate, that in a code change year, that it will take longer to produce a set of plans, and that your design team will be under more pressure to produce plans on the same schedule. Because of course, as the developer driving the process, you want the plans produced in the exact same time period (or sooner) that the team did before. In a code change year, it's powerful to anticipate friction or breakdown, and plan around that. This is no ones fault particularly, as our project designs are similar from project to project. However, there is enough variation in the project plans, and more particularly, because we build in multiple cities, the additive complexity of new rules and different cities slows the process down.

2. Codes are interpreted by your local city, and more particularly, by the building department and a specific person who is ultimately the senior responsible person at the city. In CA, we call this person the "chief building official". That person is the ultimate arbiter of code interpretations for a project.

Why is this important? As you work in each city, they will interpret and apply the codes in different ways from other cities, and you may on occasion run into breakdowns related to how they apply the code.

On this project, we wanted to fit 4 units on the site, with front and rear setbacks, with a specific unit type (town house, family unit), guest parking, common open space, driveway, trash enclosures, utility locations, and other site planning details. This drove an unusual need to design the unit layouts such that the units, that are attached in row (or were in the original design) side by side, needed to overlap each other in small ways. An example of this, is that in one unit, a bedroom on the second floor of one unit, cantilevered over the first floor garage on the unit next door. Now in most cases, as apartment units, this is not a big deal. In our case though, due to this overlap, the need for fire separation between units, and the fact that we had no living space on the ground floor, the city made the interpretation that there were multifamily units (normally what we want) AND that they required elevator access to all floors above the 1st floor (normally in a town house unit what we don't want).

We've worked in Long Beach a long time, but this unit and project type (town house rental) has not been done in Long Beach for decades, and the new codes and new interpretations of the codes came to be important in a negative way. On single townhome units we DO NOT want to put an elevator in each unit, too expensive as you would expect. An alternative way to design the project, would be to put common upper floor walkways to the entrance of each unit (called "catwalks") and have all units served by just one elevator. But this was not at all our design intent, much less that our UTH project type, is highly sensitive to non-rent producing costs, and which we must avoid or eliminate. We spend time eliminating all costs that can be, to increase the efficiency of rent produced as a function of costs spent. We call this NOI/Cost, and we want the ratio to be as high as possible. This ratio calculates a dollar of NOI produced by dollars of cost to build.

So we went back and forth with the city, who hadn't seen a rental townhouse in many years (they've seen for-sale towns, but a different animal in many ways). We came up with the idea of separating the 4 units into two duplex units on the same lot.

This resolved the elevator/catwalk issue, and actually created a nice common open space that was less so in the early design. It put some pressure on the unit design, but nothing that we couldn't get comfortable with and did not require any crazy construction solutions or costs.

I'll end this post here (GC selection next post shortly) and say:

Fundamentally you must always plan for a certain amount of friction on a development project. This is why the profit per project is higher in most cases than a value add apartment deal. More strategic knowledge, more friction, more risk, more profits. The better you anticipate the friction, plan for the friction, and underwrite your proformas with this factor, the better off you'll be. For new developers (and some veterans) surprise is the enemy.

Development deals are more complicated and have more moving parts to manage. I read and watch Grant Cardone as part of my competitive learning practices, and he had a really good way of looking at it, to paraphrase: Complexity is the enemy of profits, keep it simple.

Of course you'll say, Scott why then do you do development deals, and I'll answer: Development requires a high degree of strategic knowledge, and can be highly profitable. It's a niche, and not everyone can or chooses to do it. This give us a competitive advantage. But we also want to simplify in every possible way the development offers that we make. This is why we created the UTH housing concept, to develop and build a very very simple yet in high demand residential product. We've eliminated parking podium/garages, complex structural design, reduced complexity in all design facets, systems, specifications, etc.

So we stay in the domain where we have a high amount of hard-to-obtain strategic knowledge (i.e. development) combined with a simplified residential product, delivered into a highly supply constrained market, to families that have a deep need for our housing offer. This is the formula that we have created that we believe will have a long term demand arc.

Scott

3 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

We will be starting construction here in the next 2-3 weeks given our present schedule. We are working on two major task groups:

The make ready process, those items required to be in place to actually start construction. When we are at this stage it's always really important to be very vigilant regarding the list of items to make ready, and to be actively tracking them with your team (early this morning I sent a list of follow up items that I am tracking on this project to my partners in the deal and my team). The reason is the incredible amount of friction (a term you seen me use often) which are all those little things that stand in the way of starting.

Examples would be permits, but I am really meaning more granular items in this stage: the paperwork that goes to the school district to sign off on payment of school fees, the county sewer connection application and fee payment, the public works department sign off on existing sewer location, on and on and on. This is where a great project manager really makes a difference (maybe that PM is you) to be constantly checking status on a million little processes.

So here's what we are working on:

1. Building, grading, demolition, temporary power pole, and all other needed city permits. This includes numerous paperwork needed, such as special inspection certifications (who will do them), grading bonds, county sewer connection application, public works alley land dedication sign off, planning department sign off, fire department sign off, temp power pole permit application, etc.

2. Fee payments - school fees, county sewer fees, permit fees, development impact fees

3. Utility disconnection - in SoCal the timing for these can be very long, a few weeks in some cases, so you don't want to wait, be ready to start, and then find out your gas connection is still active, and no demolition can take place.

4. Asbestos Survey and AQMD Demolition Notification - required whether ACM (Asbestos Containing Material) is present or not. If present, you ASB removal contractor will prepare and submit. If no ACM, then demolition contractor submits. Requires a fee either way.

5. Site preparation - install temp power pole, stage const. office trailer, install site fencing, stage temp. toilet, install erosion control (straw waddles, silt fence, rock entry), install temp water, install site web camera.

The other major task group we are working on is the selection of subcontractors, and if warranted, a general contractor.

The methods of running construction on a project like this are:

A. General Contractor model - hire a third party GC, let them run the construction.

B. CM Prime Subcontractor model - where the developer or ownership entity is the construction manager (but not a GC) and all subcontractors sign prime (direct) contracts with the owner. Sometimes the CM can be a third party, and not the developer.

C. Owner General Contractor - developer holds a general contractors license and run the construction process in house. I sometimes call this the "Homebuilder" model, as most major homebuilders run their projects this way.

In the last two models, it is critical to have built a network of subcontractors that are trustworthy and competent to deliver on budget and on schedule performance.

This is where I see a lot of folks new to the business have breakdowns, they either haven't or can't build their networks effectively - either general contractor or subcontractor networks. That's why you hear so many horror stories here on BP and in the market generally. And by the way, we experience it too. Sometimes generals or subs just fall apart, personal issues, financial issues, people get sick and unfortunately they die. These all effect human organizations, it's just more prevalent in the construction industry. As projects, generals, and subs get bigger, these issues tend to be less. But at the small and medium end of the construction markets you'll see this more often, and need to plan accordingly.

In my next post I'll layout ways to make assessments of generals and subcontractors to help avoid making the wrong choices.

Scott

2 Reply

Sarah Lorenz

Specialist · Ann Arbor, MI · Member since 2016 · 356 posts · 191 votes

9y

Scott Choppin your recent account of the changing codes and new elevator requirements was interesting. I’m curious to know how you arrived at the two duplex solution. Do you find that you have to do most of the creative thinking, or do you have an architect or design team that is able to innovate in these situations?

0 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

9y

@Sarah Lorenz

Great question. The answer is both. In this case the architect came up with the idea of the "double duplex" (4 unit) idea. So all the credit goes to him.

In other cases, we'll collaborate on solutions to issues either generated by a particular site or how a city works.

Example, we are working on a new project, a triplex in city of Los Angeles, where the adjacent property has a 10' driveway easement over the lot we are working on, which is 42' wide. So we have 32' to work with (we can also use the driveway for our cars). The architect and our team batted ideas around, tried some designs we used previously and would prefer to use always, call it our prototype. But the backup space for the garages, typical for our prototype unit where the garage is located on the bottom of the unit didn't work (not enough feet to meet parking code). Together we came up with a design where the parking is at the back of the site instead.

Bottom line, he holds the building codes, he and I hold the zoning code and the build methodologies, and our team holds the cost/feasibility. Not to say our architect is indifferent to costs, he absolutely is (and I remind him regularly!!). Your choice of consultants should help you with this, not hurt you.

As the developer, our team and myself must always track and prioritize all design ideas/changes/solutions against cost/timing/profit. It's ultimately our and our investors bottom line, so we watch it closely!!

0 Reply

Will F.

Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes

8y

Thanks for the updates Scott!

This just shows the intricacies and how much experience is needed for RE development. Simply put "it ain't easy". Even flipping a house and house hacking ain't 'easy'...you can read yourself to death and still lose your shirt...

In the not so distant past, I've dealt with the LADBS on a smaller project...At that time just knew the city was 'slow' and had to be 'worked through planning'. I didn't understand all the nuts and bolts of this process. There are a million variables that come up as Scott already pointed out above... Sometimes the city will throw things in the back burner or a city employee is just on leave too. I've had plans I turned in lost before, they're humans too...

It is interesting how much a building official's interpretation of codes really can determine what applies to a project. Often you need real world experience and knowledge in order to actually make these decisions.

I definitely agree to keep it simple (as much as possible)...even though development in itself has so many moving parts. This seems so complex if you aren't used to construction and planning, but I think with an expert like Scott this can be done 'simply'. There's like 20+ years of experience (and actual execution not just theory) behind what he's saying.

Also so true what you said about the shortage of this UTH style rental housing availability. It's either high priced SFRs that are C or below ...just old, jenky houses that somehow in this rental market get the rents, or the market is for small sf /unit multifamily, like 2 br or smaller. This is a very interesting niche. It makes sense when you think about the local market, what others are building, and housing supply...and probably some other factors. Other builders are not building mid range affordable housing. What Scott is doing is thinking ahead of the curve and being an innovator here using his knowledge of local building/RE and experience building.

This stuff can take decades to truly understand before you start having success. And it really takes more than a lifetime to master. It isn't 'easy' by any means as some 'gurus' out there sometimes claim.

If I had more capital or was more passive in my investing, I might actually buy these apartments to hold. They make sense to me as a long time landlord in this market. And having the sec 8 as backup provides a worst-case-scenario plan....this is what a good amount of other developments don't have. It will make sense to small apartment buyers

This is a dynamic market and investors should be thinking multi-dimensionally and many steps ahead. And again real estate is not easy, but it is fun ;-)

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

Thanks Fred (@Will F.) !!

Appreciate the positive feedback!!

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Karen MargraveBusiness Member

Moderator

Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

8y

Great thread. Did you break ground yet @Scott Choppin ? Do you have a rendering that you can share of the new design? I'll be looking forward to your updates. Good luck.

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

I thought I would add to this thread with a more detailed explanation of apartment financial underwriting. Earlier in this thread, I delineated how to underwrite and model an apartment project income and expense summary and construction cash flow.

Investment Yield Ratios

Here we'll cover investment yield ratios that we utilize as a professional development company, to analyze the return characteristics to determine if a project is worthwhile in our initial underwriting, as well as, provide final financial return reporting on completed projects.

In the development business, these are the major financial ratios used to measure investment yields on equity investment by professional developers, institutional level and mid-size equity investors:

Internal Rate of Return

Equity Multiple

ROI or Cash on Cash

Internal Rate of Return

First, the textbook definition:

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company's required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.

Now, the real world definition:

IRR is the rate of return produced by investing equity into a development project at the beginning of a project's investment cycle (this could be cash used for predevelopment costs, land close, and funds for construction) and getting repayment of original investment plus yield on the invested capital at the end of the project. The major advantage to using IRR, is that it takes into account the time/value of an investment, and allows IRR or rates of return to be compared between investments with different time cycles. You can compare an equity investment for a project that takes 1 year to invest and repay, to a project that takes 7 years to invest and repay, then choose which produces the higher IRR. This is why IRR is used by sophisticated and institutional level investors.

Understand this: the longer an investment takes timewise, the more likely the total IRR will be lower and trend downward. As well, the opposite is true, if the investment time cycle of a project is very short, the IRR could spike very high, especially when an investment period is under one year.

Once the first dollar of equity is invested then the clock to calculate the IRR starts and ends upon the final repayment of the original equity investment, any preferred return (called "pref") and the backend profit splits allocated to the equity investor. We'll explain more about the practical aspects and presentation of IRR's when we write about raising capital in the equity markets.

One item to remember: IRR is not an assessment of risk, and is an assessment of generated returns on invested equity over a given time period. Although IRR can be used to compare investment choices as stated above, you as the developer must make an assessment of risk and any associated mitigations to risk in order to effectively compare potential investments.

Equity Multiple

First, the textbook definition: A ratio dividing the total net profit plus the maximum amount of equity invested by the maximum amount of equity invested. The Equity Multiple (EM) of an investment does not take into account when the return is made and does not reflect the risk profile of the offering or any other variables potentially affecting the project’s return.

There basic formulaic structure for EM:

Equity multiple = cumulative distributed returns / paid-in equity

or

Equity multiple = paid-in equity+yield on equity / paid-in equity

The way I think of equity multiple pragmatically is this: What's the ratio of the dollars I get back based on dollars I put in? EM is a way to measure the whole dollar return of the project given the investment. Many times an institutional investor or fund wants to achieve a certain amount of dollars back from the investment, say 2 dollars for every dollar invested, or a 2.0 equity multiple. This can help them measure and account for the time, energy, and money they invested. Is it worth investing in, if it does or does not return a certain amount of whole dollars?

As an example: An equity multiple of 1.3 is less attractive to an investor versus 2.0 multiple. EM is a static measurement and does NOT account for the time value of money in the measurement. It just says plainly: How much money do I invest, and how much money do I get back, and what is that ratio?

Example: We invested $50,000 in equity in the project, and received total distributions of $100,000. So our EM is 2.0. But, if the time period for the payout was 18 month the IRR might be 40%, but if paid over 10 years the IRR might be 15%*.

* these examples are simplified for this explanation and are not real measurement of yield.

You really want to use IRR and Equity Multiple in tandem, each to measure yield on the project in different ways. IRR is a dynamic measurement of yield that accounts for the time value of money and total investment returns over time. EM is that ratio or measure of the total magnitude of generated yield in terms of whole dollars.

Cash on Cash (COC) Return or Return on Investment (ROI)

COC/ROI = Yield*/Paid-In Equity

* In this case, yield could be total profits generated from the sale of property, or it could be annualized cash flows from income producing projects.

This is a simplified method of calculating yields on equity investments. It is (or can be) a dynamic measurement of yield if applied to ongoing cash flows generated from net rental income. When applied to a one time capital event, a sale for example, it is a static measurement. Some non-institutional investors use ROI as their preferred measurement, in many cases because calculating IRR is a more complicated calculation. But like EM, it does not take into account net present values of cash flows over time, and therefore is not completely accurate and usable to compare alternative investment choices. For our company, we like to use COC to measure the potential annual net cash flows when underwriting development projects that may be long term hold candidates.

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

@Karen Margrave

Thanks for checking in.

Plans are complete through plan check, with permits ready to issue. The project is fully bid out to the subcontractor markets and we have a final internal approval on the schedule of values. Putting the finishing touches on the financing, now that costs are finalized. Should be ready to start here in the next 2-3 weeks.

Now that we are closes to start, you guys will get to see

1. a post about the process of initiating and managing the bid process, assessing scopes of work, and finalizing pricing from the selected subcontractors (this process can apply to general contractors as well). I'll post the schedule of values for the projects (numbers redacted to protect the innocent).

2. a post about the "get ready" process, disconnecting utilities, paying permit, development impact and school fees, etc.

3. a post/s with some actual demolition and construction

I don't have any renderings per se, only the black and white 2D elevations from the CD's. Let me know and I can post those.

Scott

0 Reply

Kamyar Fg

Irvine, CA · Member since 2015 · 4 posts · 0 votes

8y

Scott, since your urban townhome product is a rental, would you as the builder still have a 10 year liability or is that not the case as its not for-sale product? If so, is that an additional insurance cost? Thank you!

0 Reply

Kamyar Fg

Irvine, CA · Member since 2015 · 4 posts · 0 votes

8y

Scott, since your urban townhome product is a rental, would you as the builder still have a 10 year liability or is that not the case as its not for-sale product? If so, is that an additional insurance cost? Thank you! Also, could you condo map these units and have a for-sale execution vs rental if economically favorable?

Originally posted by @Scott Choppin:

@Karen Margrave

Thanks for checking in.

Plans are complete through plan check, with permits ready to issue. The project is fully bid out to the subcontractor markets and we have a final internal approval on the schedule of values. Putting the finishing touches on the financing, now that costs are finalized. Should be ready to start here in the next 2-3 weeks.

Now that we are closes to start, you guys will get to see

1. a post about the process of initiating and managing the bid process, assessing scopes of work, and finalizing pricing from the selected subcontractors (this process can apply to general contractors as well). I'll post the schedule of values for the projects (numbers redacted to protect the innocent).

2. a post about the "get ready" process, disconnecting utilities, paying permit, development impact and school fees, etc.

3. a post/s with some actual demolition and construction

I don't have any renderings per se, only the black and white 2D elevations from the CD's. Let me know and I can post those.

Scott

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

Hi Everyone, I have been focused on other new offers, while the Cedar project winds it's way through plan check, which has been an arduous process with the city of Long Beach. But, we are ready to start construction now, and so will be updating this more regularly now that there's more data flowing from the project to communicate out to y'all.

Here's some of the upcoming post subjects:

Construction lender selection, loan processing, checklist, loan worksheet

Subcontractor/Trader Partner bidding process, identifying and vetting new subs, review subcontract

Schedule of Values and Scopes of Work, insurance

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

Hi @Kamyar Fg

Thanks for your message.

1. There is defect liability (CA law and case precedent) but there is very little attorney driven legal action as we don't have an HOA. HOA's are the predominant vehicle for defect liability cases in CA.

2. If you build true condo product with HOA, you can purchase "wrap insurance" called OCIP, which enrolls all the team, developer, GC, subcontractors, designers into a common insurance policy. If there is a lawsuit, the insurance defends the entire team. Cost varies, but would be included in developer proforma.

3. We could do a condo map, but it would produce two effects:

A. Much longer entitlement time lines as all condo maps must go to city council for a vote under the CA Subdivision Map Act. This can add 8-12 months of additional time for approval.

B. Many/most subcontractors insurance companies will exclude coverage if you have a map on your project, and therefore subs will not bid your project unless you have OCIP, and even then sometimes they still won't bid.

So we avoid maps to vastly speed up our process, we only develop on land that is zoned and "by right" for our UTH housing model. And we like to have maximum amount of subcontractors to bid our project to maximize cost efficiency in our build.

~ Scott

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Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

At this point in the life cycle for our UTH apartments project we have selected the lender and are ready to close our construction loan and begin building our apartment units. We want to describe the general types of construction lenders, the process for finding and identifying lenders, and a general description of the underwriting process to secure a construction loan.

First, the general types of construction lenders (finding lenders and underwriting will be included in future posts):

1. Commercial Banks - your most standard plain vanilla type of lender, usually with the lowest interest rate and loan costs. The trade you make for this lower costs are:

A. rigorous, sometimes invasive, underwriting of the principals and managers of the development team, and the real estate deal itself.

B. requirement for full recourse guarantees, including full completion and repayment guarantees.

C. more conservative loan terms related to Loan To Value (LTV) and Loan To Cost (LTC). As well, many construction lenders will be more conservative in their underwriting of the permanent loan amount, as this is one of the main sources of repayment of the construction debt. The bank looks at it this way, in the instance that they will need to foreclose the construction loan, they will be more careful to make sure the deal can be viable under a foreclosure scenario.

D. more conservative stance on being "in the market" or not. Commercial lenders being subject to banking regulators, will be in and out of the lending markets much more often than the other lenders below.

2. Hard Money Lenders - a much more aggressive style of lender, both in terms of the deals and developers they will fund, and also in terms of cost (much higher rate and points), and speed of loan close. You might see loans rates anywhere from 7% to 16% per annum, normally structured as interest only, and loan fees anywhere to 2 to 10 points.

Advantages:

A. These folks lend when commercial banks may not. They want to get there money working, and unless the markets is totally off, you can generally know that some hard money lender somewhere is lending, at a cost.

B. Less rigorous underwriting of principals, sometimes no underwriting. They will focus in that case, on the real estate solely.

C. Speed of execution and closing. Sometimes, these folks are RE developers themselves, and can make fast decisions on a loan, generally without a loan committee as you would have with a commercial bank. Loan documents tend to be simpler and faster to be produced. Many do not require or don't need an appraisal. These all save time and get you to a close quicker on your deal.

Be very careful, to vet lenders in this domain, there are for sure some scam artists. Some of these folks, operate in the "loan to own" domain, meaning they would be just as happy to see the developer default, so they can take the deal over to own it themselves. As a new developer, you'll be inclined to talk to anybody who even looks your way to start a conversation about lending on your project, but you must check references, see other deals they've done, and talk to other developers who have used their loan products. There are honest and forthright hard money lenders out there, you just need to turn over more rocks to find the good ones.

Finally, by all means, do NOT pay upfront fees for them to underwrite your deal before issuing a term sheet. It sounds crazy and silly, but believe me, it happens more than you think. An honest lender will do some upfront work and underwriting, to get to a point of at least issuing basic terms in writing; a crooked lender will ask for money upfront to even begin looking at your deal. Look the lender up on a Google search, if they are hard to find, or you can't find info on the principals, or they seem to be under multiple company name, or associated with fishy circumstances - run, the opposite direction, fast. If it's too good to be true, it probably is.

3. Crowdfunded Lenders - this is a new evolution in lending. These crowdfunded lenders raise capital under the crowdfunding regulations promulgated under the JOBS Act of 2012 and associated SEC regulations, and then loan it to your project. Our experience is they sit somewhere in between commercial bank loans and true hard money, in terms of rates and points. It's worth looking at, and what's more, we have found because of the public scrutiny of being in the public domain, there seems more transparency and ability to research these folks. Still, always check references and do your homework.

4. All equity - this sounds odd, but one way to get a loan, is to raise all equity. If you can do it this way, it generally is faster, less pain-in-the-*** underwriting, but higher cost in terms of ownership and profit splits you give away on the deal. And overall your return on equity and IRR will be lower. For the right deal this can work.

This list is by no means exhaustive, and I encourage you all to talk about other types of lenders out there, please add them in the comments to this post. Looking forward to hearing more!

2 Reply

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

8y

thanks for the write up Scott....so the question we’re wondering is....which lender type did you end up going with?

1 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

Hi Amit

We are working with Pivotal Capital, where we have a previous relationship. Very good group to work with, ask for Joe Gigliello or Brad Rust, tell them I sent you.

Hope that helps.

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Bryant Patterson

Professional · Austin, TX · Member since 2017 · 33 posts · 22 votes

8y

@Scott Choppin Absolutely awesome posts. As a young developer learning the trade at a larger development firm, your content has been very helpful in helping me understand the timing and order of everything. Thanks a lot!

1 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

All right folks, here we go!!

After numerous delays related to our favorite part of the process - city plan check. We are moving forward on the actual build. For the most part, rather than type the process in text description, we think better demonstrated via YouTube videos.

This first video you have seen before, but for continuity, we'll start from the beginning, showing the drilling rig out on site to do the soils engineering analysis. At this point, we have closed the construction loan, paid the city and school fees, issued permits, completed demolition and rough grading. We are now working on foundations. I encourage you to ask questions, anything is open for discussion, minus proprietary data.

Here you go: https://youtu.be/rvVDRjltPgE

Next up grading and foundations.

1 Reply

Scott Choppin

OP

Real Estate Developer · Long Beach, CA · Member since 2017 · 251 posts · 359 votes

8y

Here's the video on the demolition, rough grading, and early foundations.

https://youtu.be/wNPT8ObXUaM

1 Reply

Terry Lao

Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes

8y

@Bill B.

found this detailed forum post for development 4 plex in Long Beach.

Terry

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Lifecycle of a CA Multi-Family Development Deal

Lifecycle of a CA Multi-Family Development Deal

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